59833 Technical Note
February 2011
Financial Sector Development
Broadening financial inclusion: Untapped business
opportunities and potential markets for the banking sector
Significance:
As the major provider of financial services in Indonesia, the banking sector plays a vital role in improving access to financial services
by outreaching to some 80 million potential clients. Many international and domestic examples have proven that banks play a vital
role and become institutional leaders in promoting financial inclusion. In indonesia, more than half of the population does not have
access or does not use formal banking services. Significant business opportunities and markets for banks remain untapped. Just as the
Government has an important role to play in broadening financial inclusion, so do the banks. Seeking innovative ways of outreaching
to the unbanked population is essential for banks, and the recent evolution of information and communication technology (ICT) and
the high level of penetration of mobile phones offer one possible means of addressing outreach as seen in other countries.
This technical note addresses the following questions: What is the role of the banks in building an inclusive financial system? What is
the relevant banking experience in promoting financial inclusion both worldwide and domestically? What can be done to reach a more
inclusive financial system?
Background Commercial banks are too `costly` for Promoting Access to Banking Services
small customers
Benefits of acquiring access to banking Initiatives on financial inclusion by both
Aside from low levels of financial literacy,
services the private sector (banking industry, bank
most small potential depositors avoid
Banks play a major role in providing associations, financial sector) and the
commercial banks because they perceive
financial services. In their simplest form, authorities (central bank, government)
banking services to be out of their reach.
bank accounts allow people to manage are discusssed below, including both
A regular savings account with a bank
money more securely and efficiently global experience and Indonesian
usually requires a monthly administration
than using cash, while loans reallocate examples.
fee and a minimum balance -- both of
resources from savers to borrowers. The
which can be perceived to be high by Financial inclusion initiatives of Bank
possession of a bank account provides
lower-income populations. For small Indonesia
a way to access more affordable loan
depositors, the interest earned on the Bank Indonesia (BI) has introduced a
products and better linkages to other
deposit is often less than the total basic bank account, TabunganKu, and has
financial products. Savings can act
administration fee, hence the amount proposed financial identity regulations
as a safety cushion during times of
of savings decreases over time. Some to promote financial inclusion. In
economic hardship, while loans provide
small borrowers are also considered non- conjunction with the Alliance for Financial
opportunities to create productive
creditworthy by banks, because they lack Inclusion (AFI), BI is hoping to conduct a
investments that can increase future
collateral or a financial history, leaving pilot project to develop financial identities
income flows. Bank loans are usually
more expensive informal loans as the for the unbanked. The project aims to
offered at lower interest rates than loans
only option for borrowing. create a financial identity database for
from the informal sector.
the unbanked population. Unbanked
BPRs have good prospects... but are still
Huge market potential still exists individuals will be provided a financial
facing difficulties
The banking sector controls almost 80 identity number (FIN) from which they
BPRs (rural banks) are relatively small and
percent of total Indonesian financial can be identified and their data accessed
serve local areas. BPRs' banking products
assets. Since 2000, bank branches have by authorized financial institutions. The
are often priced below commercial banks
increased by 70 percent, while the blueprint for the program is still under
with lower administration fees and lower
number of ATMs has almost tripled. review by the relevant agencies, along
minimum balances. Some allow deposits
Despite this increasing outreach, about with a preliminary survey of the pilot
in small denominations (even coins)
half of Indonesian households do not project in a particular segment of the
and offer door-to-door deposit (loan
have a bank account.i In 2008, over 54 unbanked population (Arisan, Savings
repayment) collections. Despite this,
million people were accessing non- School Movement, Tasik Loan's Scheme,
BPRs feel that they still lack technology
bank financial services (mostly from the and MFI Customers). Basic bank accounts
(networks) to support banking services,
informal sector) while over 27 million will be offered to these groups once they
as well as qualified and affordable
others did not use any financial services acquire a FIN. BI also plans to develop
human resources. The high cost of funds
at all.ii With the right approach, banks financial identifiers for the banked
also often creates difficulties for BPRs in
are well placed to reach these potential population which will include customer
competing with the micro divisions of
clients, especially those who regularly ID numbers (CIN) for those with bank
use informal financial service providers. commercial banks. accounts and debtor ID numbers (DIN)
for borrowers. In due course, FIN, DIN,
Financial Sector Development
Technical Note
and CIN will be integrated into a single ID In Peru, more than 7,000 rural women banks and do not earn interest.
number (SIN), a unique financial identity living in the Puno-Cusco Corridor · WIZZIT, a division of the South
for each person recorded in the system. participated in a 1-to-1 matched savings African Bank of Athens, offers a
scheme with initial deposits of up to transaction banking account that is
A. Basic Bank Accounts US$34. Withdrawals could be made for accessible through mobile phones
Mainly intended to attract unbanked productive purposes such as investments and (Maestro) debit cards. The
potential customers, the basic bank in education, health, housing or signing-up fee is US$5.26, there is no
account features a low or zero minimum microenterprise. Matched savings are minimum balance or monthly fees,
balance and no monthly administration also practiced in Australia, Singapore, only a pay-as-you-go pricing model
fees. The application procedure is South Korea, the UK and Uganda. with charges ranging from US$0.13
simplified and few identity documents to US$0.66 per transaction. WIZZIT
are needed. Since 2005, the Reserve Bank C. Branchless Banking had an estimated 250,000 customers
of India (RBI) has encouraged banks to The convenience of shorter trips to at the end of 2008.
offer such `no-frills' accounts. Also with deposit-taking facilities can increase · G-CASH in the Philippines is a
limited free transactions, the Mzansi transactions and banking participation. mobile-wallet-type phone-banking
account has been offered in South Africa technology provided by Globe. The
since 2004. In 2008, two thirds of the 3.5 Doorstep savings collection schemes P2P transfer costs from PhP 1 to
million active Mzansi users were first- are one useful traditional example. PhP 40,000 per day or a total of PhP
time bank customers. From the 1970s to · The Pygmy deposit scheme,iii 100,000 per month. In addition to the
the 1990s, the Indonesian Government a daily deposit commitment PhP 1 cost of sending a text message,
offered Tabanas savings accounts to savings scheme, was successfully a flat fee of PhP 10 is charged for any
specific target groups such as students, implemented by the Syndicate Bank transaction below PhP 1,000 and
youth organizations and government in Karnataka State, India. Field agents about 1 percent of the amount for
employees to nurture saving habits. collected a minimum quarter of a transactions over PhP 1,000. In 2008,
Interest rates were paid on a sliding scale rupee per day from the doorsteps of G-CASH had over 6,000 domestic
with a higher rate for the lower balance customers (street vendors, laborers, outlets providing services to 1.9
to encourage small savers, calculated village traders) with a lower-than- million subscribers.
based on a minimum monthly balance, regular interest rate to cover the
disbursed annually, and exempted from high collection costs. Mobile electronic data capture (EDC)
tax. In late February 2010, BI along with 70 · Bank Dagang Baliiv offers daily mobile technology enables bank employees to
commercial banks and more than 1,000 collections as part of its service. It conduct teller transactions at consumers'
rural banks introduced TabunganKu, has three types of collection team: locations (their house/business place),
a basic bank savings account. Notable one on foot, covering the areas reducing the need for customers to visit
features such the low minimum balance, nearest the branch; one traveling by their bank branch. It can process deposits,
no administration fees, and low interest motorcycle, covering more distant withdrawals, money transfers or balance
rates (up to 1 percent). While making clients; and one traveling by car, inquiries. The GPRS module enables
saving cheaper, TabunganKu offers serving the furthest clients from the online transactions; a biometric sensor
no incentives for making more bank branch. and a card chip reader set up a verification
transactions. process; and a print-out provides a record
Mobile banking technology allows of transactions. Bank Mandiri, Danamon
B. Savings Encouragement lower-income customers to access Simpan Pinjam, Bank Sinar Harapan
Matched savings is an incentive to banking services using their mobile Bali, and BTPN have been utilizing this
encourage saving habits in marginalized phones. Transactions are conducted system to serve their microbanking
individuals by matching their savings using secure SMS up to a certain segment. In April 2010, Bank Sinar
to a predetermined goal or ratio, with monetary limit in compliance to the Harapan Bali introduced Sir@t, layanan
a cap on the total amount. In the Anti-Money Laundering Act (AMLA). The transaksi sarat teknologi (technologically
US, American Dream Demonstration services range from person-to-person equipped transaction services), an EDC
applied this approach to 2,300 low- (P2P) transfers, payment of bills, airtime service that also serves as a payment
income individuals (80 percent were purchases, and even deposits/top-ups or point for bills. Until May 2010, the bank
female) in 13 sites. Matched funds withdrawals in certain outlets. operated 20 EDC devices across Bali and
were kept in a separate account and · In Kenya, M-Pesa had 9 million completed 2,097 withdrawal transactions
disbursed only upon verifying receipts customers in 2007 (40 percent of and 1,694 deposit transactions. Due
of small businesses or home repairs. the adult population) with outlets to their widespread acceptance, the
The Taiwanese Government's Family outnumbering by nearly five times bank planned to increase the number
Development Account is a 1-to- the total number of Postbank of operating EDCs to 100 by June 2010.
1 matched savings scheme for 36 branches, post offices, bank BTPN (Bank Tabungan Pensiun Negara)
months after the first deposit by welfare branches, and ATMs combined in the has used mobile EDCs to serve its micro-
recipients, targeting women, high school country. The maximum cap for all banking segment since late 2008. Using
students, or households with low-income transactions is US$500. Registration mobile EDCs, off-branch transaction
single mothers with financial education and deposits are free, but services officers (OTO) on average can process 10
class attendance requirements. Funds are charged from US$1.3¢ to US$40¢ to 25 transactions daily
are accessible after three years for per specific transaction. The full
investment purposes, higher education, value of all M-Pesa balances is stored D. Linkage Program
small businesses, or first home purchases. in pooled accounts of two regulated Self-Help Groups (SHGs)v in India offer
Financial Sector Development
Technical Note
interest-bearing loans to their members Statement 2005-06, RBI applied the short-term risk insurance products.
with the funds coming from regular following policies to promote financial Financial institutions are also
voluntary thrift activities. Most SHGs are inclusion. obliged to devote a minimum of 0.2
promoted and nurtured by institutions, a) introducing a basic banking `no frills' percent of post-tax annual operating
such as NGOs, banks, farmers' clubs, account in November 2005, with profit for consumer education. Each
government agencies, or self-employed simplified KYC procedures; financial institution is given a rating
individuals. The SHGs' experience in b) introducing a General Credit Card on an annual basis based on the
informal loans enables them to learn the (GCC) credit facility in 2005, with results of the scorecard.
essentials of financial intermediation, revolving credit entitling the
basic account keeping, and the skills holder to withdraw up to the limit Concerns and Recommendations
needed to handle resources of a larger sanctioned;
size. Encouraged by the Reserve Bank of c) rolling out a financial inclusion Grand strategy on financial inclusion is
India (RBI), banks offer non-collateralized drive (starting in 2008) requiring necessary
loans to stabilized SHGs that show mature every SLBCvi to identify one or more Developing a comprehensive strategy
financial behavior. Banks decide on the districts in its home states for 100 on financial inclusion could offer a more
interest rates but terms and conditions percent financial inclusion; cost-effective way of approaching the
are up to SHG members. Since the SHGs d) allowing banks to use NGOs, issue. Clearly articulated objectives,
have already acquired a certain degree SHGs, MFIs, or other civil society target populations, and inter-linkage
of financial discipline (through their thrift organizations as bank intermediaries between initiatives would improve
activities and internal lending), as well able to receive deposits and provide the implementation of a strategy.
as the existence of peer pressure, timely withdrawals using innovative IT Harmonizing the existing program among
repayments and social collateral for solutions in January 2006; departments, ministries, and institutions
loans are ensured. Three types of linkage e) expanding the list of priority sectors would help to avoid duplication and
model of bank-SHG exist: (1) direct in 2007 to more employment- achieve more effective synergies. The
linkage, without facilitation from other intensive sectors such as agriculture, South African experience shows that
institutions; (2) indirect linkage, with small enterprises, the retail trade, a collaborative approach between
promoting institutions as the facilitator; educational loans, microfinance, government and the private sector with
and (3) indirect linkage, with promoting and low-cost housing, while also clear objectives and guidelines in a viable
institutions as a facilitator and a financing promoting financial literacy; and business manner can successfully extend
agency. Until March 2007, around 74 f) launching a multilingual website in the reach of financial services to the lower
percent of the total linkage came from 13 Indian languages on all matters half of the population.
model 2, while model 1 had 20 percent concerning banking and the
and model 3 was 6 percent. common person in 2007. Promote financial education at an early
stage
Swamitra is a partnership between South Africa's Black Economic An example from India shows that
Bank Bukopin and cooperatives to Empowerment (BEE) Charter was introducing affordable financial products
reach the feasible-but-not-bankable released in October 2003 by the Banking without effective financial literacy
small and micro-business customers. As Council of South Africa with the objective intervention for the targeted customers
cooperatives, Swamitra partners of Bank of increasing access to financial services results in a low level of usage despite
Bukopin are able to offer their members for poor households and communities. 100 percent access availability. Cases in
savings and lending services with greater While maintaining sound business Kenya and South Africa show that the
ease than banks. Bank Bukopin provides practices, charter membersvii agree that younger generation are more open to
IT system enhancement, banking when sourcing products and services technological solutions and this can
management training to officers, and the financial sector should apply to help to drag the older generation to
working capital to its cooperative the Charter and its scorecard. The also participate. Regular transaction
partners that enables the delivery of Charter targeted that by 2008 a certain experience with a bank is also more
financial services accessible through percentage of LSM 1-5 (the lower half effective than a conventional financial
online networks in a prudent manner. of South Africa's measure of living education approach. Limited free
Swamitra has steadily grown over time: standards) would have effective access transactions was the banks` way to
units expanded from 387 in 2007 to 488 to appropriate first-order and affordable entice first-time banked customers
in 2009, while total asset value increased financial services. The charter requires to realize the costs and benefits of
from Rp 670 billion in 2007 to Rp 1,050 increases in access to LSM 1-5 as follows: each bank transaction. In the past,
trillion in 2009. Credit ranging from Rp a) 80 percent increase in access to Tabanas had a role in providing first-
2 million to Rp 50 million was given to transaction products and services; hand banking experience for students
103,300 customers in 2009, totaling Rp b) 80 percent increase in access to bank and members of youth organizations
846 billion. savings products and services; since early childhood. Apart from
c) a certain percentage increase in making a (mandatory) curriculum on
E. Nationally Coordinated access to life assurance products and financial education to school children,
Inclusion Strategy services; TabunganKu can be applied to replicate
India's financial inclusion program uses d) 1 percent of LSM 1-5 + 250,000 from Tabanas school-segmented penetration.
a multi-pronged strategy to promote all segment increase in access to Once familiar with standard banking
financial inclusion. After explicitly collective investments products and transactions, these young people can
introducing the term `financial inclusion' services; and then become financial education
for the first time in its Annual Policy e) 6 percent increase in access to facilitators for the banks by imparting
Financial Sector Development
Technical Note
their knowledge to the older generation. i Improving Access to Financial Services in
Indonesia (World Bank, 2010).
Improving the capacity of BPRs
Savings can better reach low-income BPRs could potentially serve customers ii Bank Indonesia presentation in World Bank
Workshop on Enhancing Access to Formal
customers than credit living in remote locations. A `tiering' Financial Services in Indonesia assumed that in
For unbanked customers, developing system based on the size of BPRs holds 2008 about 70% of 228,523,300 people were
a relationship with a bank through a more prospects than the current one- on productive age and potentially banked.
World Bank study in 2010 found that out of all
savings product is less intimidating size-fits-all approach to regulation. While households in Indonesia about 49% used bank
than applying for credit. Basic banking keeping prudential safeguards in view, service, 3% used other formal financial services,
services with free limited transactions consideration could be given to lowering 31% used informal financial service, and 17% were
underserved.
and a simple KYC procedure are more minimum start-up capital requirements
iii The scheme was discontinued in the late `90s. It
effective than listing possible assets for small BPRs in remote locations, easing then re-launched in 2007 as Pigmy Plus.
that qualify as loan collateral and more reporting requirements for small BPRs in
iv It was liquidated in August 2004.
complicated KYC procedures in making regions with poor IT infrastructure, and
a loan application. Unbanked customers easing written disclosure requirements v Group of 15-20 people with similar social
backgrounds to address common issues.
should be gradually educated about in regions of low financial literacy and
accessing formal banking services to using oral briefings in the local language vi State Level Banking Committee: bank
representatives in the state, state government,
maintain their motivation while building as a substitute, are possible options and RBI.
their asset value through savings. The key for promoting BPRs growth in these
vii Representatives of banks, long- and short-term
issue here is the profitability of mobilizing areas. Allowing partial foreign or NGO insurers, black professionals and black business,
such small deposits taking into account ownership in poor remote regions could unit trusts, fund managers, and brokerage firms.
the costs of servicing this segment. also help provide necessary capital for
Innovations from other markets can be BPRs
helpful guides as to what can be done Further Reading:
to lower the costs of deposit collection What the World Bank Can Offer · Bankable Frontier Associates. "The
while providing a positive rate of return Mzansi Bank Account Initiative in
to clients. Once they understand the Collaboration on developing financial South Africa", South Africa, 2009.
mechanics of banking services and own inclusion strategy · Mas, Ignacio and Kabir Kumar. 2008.
savings, affordable credit facilities can be Some successful financial inclusion "Banking on Mobiles: Why, How, for
offered upon request against depositors' initiatives have already been Whom?", CGAP Focus Note No. 48
savings instead of collateral. Historical implemented in Indonesia, but in a rather June 2008.
deposit transactions can supplement sporadic manner. A more coherent · NABARD. "Report of The Commitee
financial history information. This approach would benefit both the banks on Financial Inclusion", India, 2008.
approach makes for a smoother transition and low-income customers. The World · The World Bank. "Finance for All:
from being unbanked to becoming an Bank can assist the Government, Bank Policies and Pitfalls in Expanding
active banked customer. Indonesia, and the banking sector in Access", World Bank Policy Research
formulating a financial inclusion strategy. Report, 2008.
Provide incentives to promote inclusion · The World Bank. "Banking the Poor,
Active involvement by the private Bringing in best practice from other Measuring Access in 54 Economies",
sector/banking industry is crucial to the countries 2009.
sustainability of a financial inclusion Relevant international best practice · The World Bank. "Improving Access
program. Authorities in other countrie examples can be provided and tailored to Financial Services in Indonesia",
have used the following incentives to the Indonesian context if requested. June 2010.
to promote financial inclusion: tax · Zimmerman, Jamie M. and Shweta
incentives to banks that serve first- Collaboration to implement pilot S. Banerjee. "Promoting Savings as a
time banked customers or poor programs Tool for International Development".
households, publicly rating banks on Public-private partnerships could pilot New America Foundation, October
their performance in providing basic innovative products and services that 2009.
banking/affordable credit to low-income/ can support financial inclusion for low-
first-time banked customer, subsidies to income segments. The World Bank can
establish a conducive environment for partner with the authorities and the
technologically innovative solutions, or commercial banking sector to help
restrictive branching laws that require test specific products and services. The
banks to open rural branches before success of the pilots would drive the
opening additional urban branches. decision to scale up
These examples could give Indonesia
guidance on some of the options
available.
For further information, contact: Access to Finance Please visit our website
Yoko Doi World Bank Office Jakarta http://www.worldbank.org/id
Financial Specialist Indonesia Stock Exchange Building
(ydoi@worldbank.org) Tower 2, 12th Floor,
Jl. Sudirman, Kav 52-53
P.S. Srinivas Jakarta 12190, Indonesia
Lead Financial Economist
(psrinivas@worldbank.org) Ph. 62 21 52993000
Fax 62 21 52993111